Overview, Functionalities, Control and Check on NCSS by

NCCPL
NATIONAL CLEARING COMPANY OF PAKISTAN LIMITED
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The Company s Overview

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BACKGROUND

NCCPL NCSS Design



In March 1999 the Capital Market Project Consultants (Arthur Anderson & Co.) were mandated to develop recommendations for a National Clearing and Settlement System (NCSS). Accordingly various committees were formed comprising of representatives from the three Stock Exchanges, CDCPL and users. Based on recommendations submitted by consultants, deliberation of the committees and subsequent approvals from the three Stock Exchanges and SECP, System design was finalized in October 2000.
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BACKGROUND
NCCPL - Incorporation & Implementation


Contd

The NCCPL was incorporated on July 03, 2001 to provide Independent Clearing & Settlement Services to all the three Stock Exchanges in Pakistan. NCSS Live operations were commenced from December 24, 2001. Initially the company was managed by CDC. Since July 01, 2005, the Company complete severed itself from CDC and now has his own management.

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Organization Structure of NCCPL

Board of Directors Audit Committee Chief Executive Officer

Chief Information Officer Legal & Compliance Software Management Network Management Systems Management

CFO/ Com.Sec.

Head of Operations Admin & HR

Chief Internal Auditor

Fin. Dept.

GL Sec.

Pay & Collect

Product Development

Customer Support

Operations

Help Desk

Database Management Customer Support Lahore Customer Support Karachi Customer Support Islamabad

Information Security

Business Continuity

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NCCPL - Legal Frame Work

The operations of NCCPL are governed by the following:  NCSS Regulations 2003;  NCSS Procedures 2003;  Clearing House Companies (Registration and Regulations) Rules 2005; and  Companies Ordinance, 1984

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Corporate Governance
a) Board of Directors
The Board of the Directors comprises of 11 Directors of which 9 are appointed by the shareholders,1 is nominated by the SECP and the CEO by virtue by his office.

b)

Code of Corporate Governance

The Company has voluntarily adopted the Code of Corporate Governance to implement good governance practices. These inter-alia include;

 

Forming an Audit Committee of the Board comprising of non-executive directors; Appointment of Chief Internal Auditor, Chief Financial Officer and Company Secretary by the Board; Holding the number of the Board Meetings as recommended by the Code; Issue of Quarterly, Half yearly and annual financial statements;

 

Cont
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Corporate Governance

Circulation of Statement of Ethics and Business Practices to establish a standard of conduct for directors and employees of the Company; Adopting of vision/mission statement and overall corporate strategy by the Board; and Hold presentation for the orientation of directors, as required by the Code;

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Corporate Governance

Cont..

c)

I.T. Steering Committee

The Company also has a I.T. Steering Committee;

 

deliberate IT related strategies and policies; Committee Comprising of experts from stock exchange and Financial Institutions.

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NCCPL Shareholding Structure

Authorized Capital Issued And Paid-up Capital SR. # 01 02 03 04 TOTAL

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Rs. 100.00 million Rs. 63.70 million % OF SHARE HOLDING 47.06% 23.53% 17.65% 11.76% 100.00 %
10

SHAREHOLDERS (Rs. 63.70 million) The Karachi Stock Exchange Lahore Stock Exchange Pak-Kuwait Investment Corp. Islamabad Stock Exchange

Companys Achievements
Following major achievements have been accomplished by the Company:
 

Independent management Registration under Clearing House Companies (Registration and Regulations) Rules 2005 on March 7th, 2006

Appropriation of Rs 100 million as initial contribution towards Clearing and Settlement Fund as required by the above Rules

 

Formation of Clearing & Settlement Fund Trust Successful implementation of Unique Identification Number (UIN) functionality on the National Clearing & Settlement System (NCSS)

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Companys Achievements


Cont

Introduction of mechanism for Cash Settled Future Contracts (CSFC) to collect and disburse marked-to-market losses and profit through its NCSS Pay & Collect Functionality Implementation of Institutions Delivery System (IDS) functionality to Institutions for Clearing and Settlement of their regular trades directly through National Clearing and Settlement System (NCSS) Modifications in NCSS to facilitate Unified Trading System (UTS) Platform for LSE and ISE members for execution of their trade and transaction on the same unified trading System (UTS). Establishment of DR/BC site along with Branch Office

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Companys Achievements




Independent IT Set-Up effective from July 01, 2007

Procurement of Server and Hardware Implement Network infrastructure and connectivity Establish four Data Centers

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Future Projects

     

Following are the major upcoming future ventures Implementation of CFS MK-II through NCCPL Risk Management of Financial Institutions Recording & Settlement of Futures Market Contracts Through NCSS Establishment of Companys Owned Head Office Issuance of Share Capital

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Major Challenges

Hiring of appropriate Human Resource Space constraint

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NCCPL Data Centers

  

Main Data Centre at Head Office in KSE Business Continuity Site in Karachi Branch Data Centers at Offices in LSE and ISE

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Network Links

    

Intercity connectivity through 1-MB DXX connectivity through PTCL First-level Redundancy through Frame Relay link (provided by Supernet) Second-level Redundancy is available through ISDN lines All these links are available at Head Office, BC Site, Lahore Office and Islamabad Office Head Office and Business Continuity Site are connected through Dark Fiber

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Remote Access
   
Clients in KHI, LHE and ISB who do not have offices in KSE, LSE or ISE have the option to dial in to the network of NCC They have the option to use normal phone lines (56 kbps) or ISDN-BRI lines (128 kbps) Redundant PRI lines have been provided in each office for remote connectivity Also, the PRI lines available at Main and BC sites can be used as backup of one another

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Business Continuity

 

Business Continuity site shall be fully functional in July 2007. All business data shall be copied to the BC site in real time thereby ensuring zero-loss of data.

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Network Resilience

In case of unavailability of NCC Data Centre in KSE, the network provides seam less connectivity for KSE with the BC Site of NCC In case of unavailability of NCC Data Centre in LSE/ISE, the network provides seam less connectivity for LSE/ISE with the Main/BC Site of NCC

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System Security

 

All transactions between Clients and business machines are encrypted through VPN tunnels All client machines are installed with host-based security software which eliminates any malicious activity as well as protects against viruses, spam, etc. During next quarter, we plan to provide Digital Certificates stored on Smart Cards to all our clients. These certificates shall be used initially for User and Terminal Authentication, and later on Transactional Nonrepudiation will be implemented in NCSS through the digital signatures.

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High Availability

 

Most of the networking equipment has been implemented in highly-available configuration For example, if one firewall goes down the other firewall continuously provides the protection without any interruption to the business activity

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National Clearing & Settlement System (NCSS) Overview

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Major Benefits of NCSS

Cross Exchange Netting for both cash & securities.

Automated Pay & Collect

No physical receipt / issuance of instruments

Automated process of securities settlement directly between CMs.

Settlement of non-broker institutions for CFS transactions directly with NCSS.

contd
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Major Benefits of NCSS

cont

Settlement of broker to broker transactions directly with NCSS to facilitate transactions of brokers of different exchanges. Cross Exchange Netting for both cash & securities for CMs who are members of more than one Stock Exchange. Margin Financing through independent module on NCSS. Settlement of net obligations directly between CMs as per undisclosed Balance Orders. Registration of Unique Identification Number (UIN) of all clients with codes

  

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NCSS Operational Highlights

Monthly per Day Average No. of Trade and Transaction Settlements on NCSS

200,000 180,000

192,454 182,256 167,904

160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Jan '06 Feb '06

150,767146,291

139,166 124,578 126,790 126770 112,582 102,235 109,341

126,522 114,944

Mar '06

Apr '06

May '06

Jun '06

Jul '06

Aug '06

Sep '06

Oct '06

Nov '06

Dec '06

Jan '07

Feb '07

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NCSS - Operational Highlights

Monthly per Day Average of Settlement Volume (Shares in million)
200 180 160 140 120 100
80

196

141 121 126 100 90 71 76 77 59 101 85 77

135

60 40 20
-

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

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NCSS - Operational Highlights

Monthly per Day Average of Settlement Value (Rs. in million)
300,000

297,169

250,000

248,363 230,316 213,536 206,740

200,000

187,814

182,145 146,836 124,727123,157 143,881

150,000

139,851 123,632

100,000

100,866

50,000

Jan-06

Feb-06

Mar-06

Apr-06

May-06

Jun-06

Jul-06

Aug-06

Sep-06

Oct-06

Nov-06

Dec-06

Jan-07

Feb-07

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NCSS - Operational Highlights

Highest Ever

Maximum Number of Balance Orders (BOs).

13,615

Maximum Volume of Shares Maximum Value of Shares

314.9 (M) 24.83 (B)

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Statistics
Active Clearing Members (As of May 2007)
Islamabad, 58

Lahore , 138
Broker Non Broker Total 340 202 542

Karachi, 346

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Statistics

No. of NCSS Eligible Securities (as on May 2007)

No. of Live Securities No. of Securities Eligible for Broker To Broker (BTB) No. of Securities Eligible for Institutional Delivery System (IDS) No. of Securities Eligible for Margin Financing (MF)
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527 21

527

143
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Statistics
No. of Settling Bank / Branch Setup (as on May 2007) Bank Allied Bank Limited Bank Al-Falah Limited AlBank Al-Habib Limited AlHabib Bank Limited KASB Bank Limited MCB Bank Limited Metropolitan Bank Ltd. PICIC Commercial Bank MY Bank Limited United Bank Limited Atlas Bank Limited JS Bank Limited TOTAL Karachi 1 1 1 1 1 1 1 1 1 1 1 1 12 Lahore 1 1 1 1 1 1 --0 0 0 0 6 Islamabad 1 1 ---1 -1 0 0 0 0 4 Total 3 3 2 2 2 3 1 2 1 1 1 1 22

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Types of Trades/Transactions on NCSS

Exchange Trades and Transactions
 Exchange Trades are
 Locked-in contracts between broker CMs Exchange trading system in the Regular Market executed through

 Exchange Transactions are

 Locked-in contracts between broker CMs executed through Exchange trading system in the Continuous Funding System (CFS) Market.  Net-buy or net sell position of broker CMs based on their futures contracts at the close of Futures Contract Period transmitted to NCSS for settlement.

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Types of Trades/Transactions on NCSS

NonNon-Exchange Transactions
 Broker to Broker (BTB) Delivery Module provides the facility of recording nonExchange transaction between broker CMs of different exchanges based on underlying exchange trades.  Institutional Delivery System (IDS) provides the facility of recording non-Exchange transactions between broker CMs and non-broker CMs based on underlying Continues Funding System (CFS) .  Margin Financing (MF) module facilitates Broker CMs to arrange funds from other Broker / Non-broker CMs based on their purchases.

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Types of Trades/Transactions on NCSS

1.

Broker to Broker (BTB)

BTB module facilitates Broker CMs in settling their inter-exchange transactions. Whereby a Broker CM, based on his underlying exchange trade, initiates BTB transactions while the other Broker CM affirms it. Once a transaction is affirmed, the settlement obligation of the initiating Broker CM is passed onto the affirming Broker CM.

1.1

Initiation Process Under this module

A BTB transactions can only be initiated by Broker CM of one Exchange to the Broker CM of another Exchange for affirmation; Affirmation Process A counter Broker CM can affirm the initiated transactions. However, the affirming Broker CM cannot edit the details of transactions posted by the initiating CM. Upon affirmation the settlement obligation of the initiating Broker CM is passed onto the affirming Broker CM.

1.2

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RECORDING OF BTB TRANSACTIONS ON NCSS

Trades executed by the Broker Clearing Members of Stock Exchanges

BTB Module on NCSS

Initiation of BTB transaction on the Basis of Exchange Trade in Regular Market

Affirmation of BTB transactions by Broker CM of Other Exchanges

Settlement in NCSS by the affirming Broker Clearing Members (CM)

Payment/Receipt in NCSS

Received/Delivered Securities through NCSS

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Types of Trades/Transactions on NCSS

2.
Institutional Delivery System (IDS)
IDS module facilitates a Broker CM and a Non-broker CM to record their CFS transactions in settling their exchange transactions directly through the NCSS. Once a transaction is affirmed, the settlement obligation of the initiating Broker CM is passed onto the affirming Non-broker CM. IDS transaction is based on locked-in Continuous Funding System (CFS & CFSR) transactions traded by a broker CM at an Exchange. 1.2 Initiation Process Under this Module An IDS transactions can only be initiated by Broker CM to a Non-Broker CM for affirmation; Affirmation Process A counter Non-broker CM can affirm the initiated transactions. Upon affirmation the settlement obligation of the initiating Broker CM is passed onto the affirming Non-broker CM. 1/1/2012 39

2.2

Types of Trades/Transactions on NCSS NCSS RECORDING OF IDS TRANSACTIONS ON

Transactions executed by the Broker Clearing Members of Stock Exchanges

IDS Module on NCSS

Initiation of IDS transaction on the Basis of CFS/CFSR Transactions

Affirmation of IDS transactions by Non-Broker Clearing Member

Settlement in NCSS by the affirming Non-Broker Clearing Members

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Payment/Receipt in NCSS

Received/Delivered Securities through NCSS

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Types of Trades/Transactions on NCSS NCSS RECORDING OF MF TRANSACTIONS ON

Buy Trade / Transactions executed by the Broker Clearing Members in Stock Exchanges

Margin Financing (MF) Module on National Clearing & Settlement System (NCSS)

Initiation of MF transaction on the Basis of Aggregate Buy by Financee

Affirmation of MF transactions by the Financier

Settlement in NCSS by the affirming Clearing Members (CM)

Payment to NCSS

Received Securities through NCSS

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Types of Trades/Transactions on NCSS NCSS RECORDING OF MFR TRANSACTIONS ON

Sale Trade / Transactions executed by the Broker Clearing Members in Stock Exchanges

Margin Financing Reversal (MFR) transactions on NCSS

Initiation of MFR transaction on the Basis of sale position at Stock Exchanges & Upto his MF open Position

Affirmation of MFR transactions by the Financier

Settlement in NCSS by the affirming (CM)

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Payment From NCSS

Received Securities through NCSS

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Settlement Options

Balance Order Multilateral Netting

T+3 Settlement Cycle

T+1 Settlement Cycle

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Prerequisite for Broker CMs on NCSS Single Trader ID

CMs Accounts

CDS Account with CDC

Settling Account with SB

SE Trader Id (Membership Id)

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Prerequisite for Broker CMs on NCSS Multiple Trader IDs

CMs Accounts

CDS Account with CDC

Settling Account with SB

KSE Trader Id LSE Trader Id ISE Trader Id (Membership Ids)

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Securities
 Eligibility:
 CDS live Securities listed at any Stock Exchange

 Trading Symbol:
 Trading symbols are allocated by NCCPL to NCSS live securities.

 Marketable lot:
 Marketable lots are determined by NCCPL as per following criteria.

Face Value Upto Rs. 10 Upto Rs. 10 Greater than Rs. 10

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Market Value Upto Rs. 50 Greater than Rs. 50 Any market value

Marketable Lot 500 shares 100 shares 20 shares

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Settlement Flow in NCSS

Buying Broker

Selling Broker

Execution of Trades at the Stock Exchange

Online trade feed to NCSS

Generation of NE Transactions

T+2

Netting of trades

Money Receive orders and Delivery SD-1 Payment orders and Delivery Receive order order Delivery of NCSS eligible securities (with blocked status)
Buying Broker Selling Broker

Unblocking of securities on Payment Confirmation T+3 SD Collect Payment 1/1/2012

Payment to NCSS

Release Payment 47

Delivery Schedule

CMs to deliver securities to buying CMs by 12:00 noon for getting credit within Banks Cash Counter Timings. CMs to deliver securities to buying CMs by 3:30 PM for getting credits by 4:30 PM. Remaining CMs to deliver securities to buying CMs by 4:15 PM for getting credits with next Settlement Date Pay & Collect.

 

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Balance Order

Balance Orders in NCSS are computed on net basis for the following transactions of a CM:

Exchange Trades/Transactions
   Regular Market Trades Future Market Trades CFS Market Transactions

Non-Exchange Transactions
   Broker To Broker (BTB) Institutional Delivery System (IDS) Margin Financing (MF)
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Balance Order Netting Mechanism

Balance Order (BO) is based on Multilateral Netting Mechanism prioritized as under:  Netting of sell and/or buy positions of CM having multiple Exchange memberships. Sell and buy positions matched among CMs of same Exchange. Remaining sell buy positions are matched among CMs of different Exchanges.

 

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Delivery Default Management

CMs who fail to deliver securities till 4:15 PM to be considered delivery defaulting CMs. Failed deliveries are reported to respective Exchange for squaring-up. Respective Exchange to square-up failed deliveries by 11:30 AM next Trading Day. Buying CMs who have already made the payments to get failed deliveries by 2:00 PM, if squared-up on next Trade Day. Failed delivery is tried to be squared-up till Settlement Date +1, otherwise, its best market value is returned to buying CMs.

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NCSS Pay & Collect

 

CMs having payable, to pay by 12:00 noon on Settlement Date. CMs having receivable, to receive by 1:30 PM, provided they discharged all their delivery obligations. CMs becoming liable due to short delivery reverses to pay by 4:10 PM. In case of money default, NCCPL shall apply money default procedures. Remaining CMs having receivable after short-delivery reverse, if any, to receive by 4:30 PM. Settling Banks to online confirm payments & collections through NCSS by the Designated Time.

  

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NCSS Pay & Collect

 Advantages of NCSS Pay & Collect:

 Automated money settlements;  Same day credits to CMs;  Settlement of amount net of clearing obligations, squaring-up obligations and Tariff etc; and  Single net settlement for CMs who are members of more than one Stock Exchange.

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Money Default Management

NonNon-Payment by a Clearing Member (CM):

  

Payment should be made by CM on the settlement day till the specific time. Payment Notice of 30 minutes shall be delivered in case of non-payment. Suspension or restriction in case of failure to comply with said notice

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Money Default Management Actions taken by a Company in case of Suspension or Restriction

ExchangeExchange-wise Money Obligation:



Segregation of Stock Exchange-wise net money obligation of a defaulter CM. Allowing proportionate netting of receivables with payables at different Stock Exchanges. For this purpose, Non-Exchange transactions shall be segregated to the Stock Exchanges where originally initiated.

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Money Default Management Actions taken by a Company in case of Suspension or Restriction

Sources to recover the shortfall:


Utilize 50% amount of Security Deposits of that Exchange of which defaulter is a member. Above Security Deposit can only be utilized against 85% of the value of securities retrieved or received by the Company of a defaulter CM. Funds obtain from Stock Exchanges to cover the short fall. For Non-Exchange transactions, Stock Exchange of initiating Broker CM shall arrange such fund. Hold back the proportionate amount of credits of CMs who are member of respective Exchange and to those CMs who were involved in the Non-Exchange transactions with the defaulting CM.
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Money Default Management Actions taken by a Company in case of Suspension or Restriction

Determination of Final Loss:



Square-up/close out the unsettled positions and determine the final loss. Serve final loss notice to defaulter CM to pay such amount by the next business day. Declaration of CM a Defaulter by a Stock Exchange or by the Company.

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Risk Management

Exposure Monitoring and Management by the Respective Exchange: Exchange:

Presently, Stock Exchanges monitor and collect margins on CMs exposure and mark to market requirements for all NCSS eligible securities.

cont.d
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Risk Management
NCSS Controls and Checks
 Movement of Securities:

cont...

Bought securities are delivered to buying CMs CDS main accounts in blocked status. Blocked securities are available to buying CMs CDS main accounts after discharging their obligations.  Short Deliveries Debits: In case of short deliveries by 3:30 PM, system additionally debits CMs accounts with the previous day Closing Prices (i.e., System Prices) with 15% margin of late/fail deliveries.  Retrieval Securities: In case of money default by CM, blocked securities in his CDS main account are retrieved by NCCPL for selling-out.
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Risk S Sharing mechanism in case of default

 Exchange trades and transactions

 Net Security-wise losses of defaulter CM are recovered from other CMs involved in the respective Securities in proportion of their volumes.  Claims against allocated losses to be settled by the respective Exchange out of the assets of the CM in its custody.

 Non-Exchange transactions through BTB, IDS & MF Non Net losses of Defaulter CM against his counter CMs are recovered from such counter CMs.  Counter CMs claims against recovery are proportionately entertained from Security Deposit with NCCPL.
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UIN Functionality on NCSS

Background
 The revised functionality of Unique Identification Number (UIN) was discussed in the various discussions & meetings among the representatives of Securities & Exchange Commission of Pakistan (SECP) and National Clearing Company of Pakistan Limited (NCCPL)  The purpose was to maintain the integrity of the UIN Database to eliminate the changes of any erroneous entries in future and clean the existing UIN Database  The UIN system is based on UIN Procedures dated April, 03, 2006 and subsequent amendments herein approved by the SECP from time to time

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Client Types in NCSS

1. 2. 3.

Individual Pakistani Citizen Individual Foreigner/overseas Pakistani citizens/Non-Pakistani residing in Pakistan Non-individuals

(a) Corporate/individual - Broker (a) Corporate Company (a) Corporate fund/other organization

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UIN Registration Details

Client Name

Appropriate UIN Client Code/Client ID issued by the Broker Client Type

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How UIN Functionality will Work?

 All members of the exchanges will enter the registration details along with their client codes through the mapping table on National Clearing & Settlement System (NCSS).  All the registration details will be provided to the Stock Exchanges at end of day.  Stock Exchanges will link up the registration details with the trading systems at their end and it will be mandatory for the members to enter client code / ID while placing any order in the trading system.  The trading systems of the stock exchanges will verify the client code / ID with the UIN registration details on Pre-trade basis and will reject any order failing this validation.

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UIN Registration for Individuals

Client Type- Individual Pakistani Citizen
The Broker Clearing Member (BCM) will first select Client Type Individual
Pakistani Citizen than name)

The BCM then enter the CNIC of a client along with the relevant details (other
If the CNIC exists in the UIN Database, the name of such client will appear automatically and the BCM can Save/Past such record the name of such client. Upon saving, such record(s) will be marked with status PENDING for approval or rejection by the Company

If the CNIC does not exists in the UIN Database, then the BCM will also enter

The records with status PENDING will be displayed in the Admin List Screen
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UIN Registration for Individuals

Client Type- Individual Pakistani Citizen
The Company will verify the CNIC from a system, provided by NADRA and mark
the status APPROVED for valid CNIC. In case, where CNIC does not verify from the NADRA , this will be marked with status REJECTED

The BCM can see the reasons for each rejected record in the UIN Setup Screen
and can change the UIN and Name of such unverified record and resubmit to the Company for verification

The Company will follow the same process of verification as mentioned above The APPROVED records will become part of UIN Database The same scheme will be applicable where the joint holder accounts are
created

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UIN Registration for Individual Foreigner

Client Type -Individual Foreigner/overseas Pakistani citizens/Non-Pakistani residing in Pakistan
The Broker Clearing Member (BCM) will first select Client Type Individual
Foreigner/overseas Pakistani citizens/Non-Pakistani residing in Pakistan than name)

The BCM then enter the UIN of a client along with the relevant details (other
If the UIN exists in the UIN Database, the name of such client will appear automatically and the BCM can Save/Past such record the name of such client. the Company

If the UIN does not exists in the UIN Database, then the BCM will also enter The BCM shall also submit the attested copies of UIN documentary evidence to

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UIN Registration for Individual Foreigner

Individual Foreigner/overseas Pakistani citizens/NonPakistani residing in Pakistan
The Company will verify the UIN from the documentary evidence and mark the
status APPROVED for valid record. In case, where UIN does not verify from the document, this will be marked with status REJECTED

The APPROVED records will become part of UIN Database The same scheme will be applicable where the joint holder accounts are
created

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UIN Registration for Non-Individuals Non

Client Type- Non-individuals

The Broker Clearing Member (BCM) will first select the category from Client
Type Non-individuals

The BCM then search the Name of a client from UIN Database
If the Name exists in the UIN Database, the UIN and Name of such client will appear automatically and the BCM can Save/Past such record

If the Name does not exists in the UIN Database, then the BCM shall submit its
request to the Company on prescribed format along with the UIN documentary evidence duly attested by the BCM

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UIN Registration for Non-Individuals Non

Client Type- Non-individuals

The Company shall verify the UIN and Name from the documentary evidence
provided by the BCM. Upon verification, the Company shall incorporate such information in the UIN Database and the BCM can register such client through a process mentioned above

The Company may, however, reject any such record(s), and such information
shall not be included in the UIN Database.

The same scheme will be applicable where the joint holder accounts are
created

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FI Margining by NCCPL

Background


By the implementation of Client Level Netting (CLN) the Broker Clearing Member (BCM) are under burden of excessive margin payable to the Exchange for their Institution Clients. It was decided to collect margin directly from Financial Institution (FI) on their affirmed IDS transaction based on Regular and CFS market trade/transactions. FIs are presently beyond the scope of ambient of the Exchange to impose out obligation on them. As most of the FIs are familiar with NCSS and have direct relationship with NCCPL as a Non-Broker Clearing Member (NBCM) it was proposed that it is appropriate that NCCPL would collect margin from FIs
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FIs Margining Process

All FIs are required to obtain a status of Non-Broker Clearing Member (NBCM) from NCCPL. After their admission as NBCM, they become eligible to affirm Institutional Delivery System IDS transactions based on Ready and CFS market trade/transactions. Upon affirmation of IDS transactions, NCCPL shall collect Value at Risk (VaR) based margins against exposure & Mark-to-Market (MTM) losses from NBCMs. All NBCMs are required to pay collateral against exposure margin & MTM losses to NCCPL with in stipulate time .

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FIs Margining Process

Contd..

Collateral shall be in the form of cash, Approved Securities, Bank Guarantee or Irrevocable Undertaking. All BCMs would pay collateral to the Exchanges on trade/transactions executed on behalf of FIs client in Ready and CFS market. Once the FIs deposited collateral against affirmed IDS transactions, NCCPL will provide the Broker side information of such underlying trade/transaction to the relevant Exchange(s). The Exchange(s) will adjust the exposure of their Brokers based on the information, provided by NCCPL

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CFS Vs CFS Mk II
CFS
Cash and securities are the only forms of acceptable collaterals

CFS Mk II
Collaterals also include Undertaking (by FIs rated AA or better), T-bills, PIBs and Bank Guarantees. yRisk management at NCCPL. yInstitutional bulk pool of funds available for at least 90 days. yDirect financing facility available to AFs
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yRisk management at KSE. yIndividual financiers making funds available at their discretion. Orders placed through brokers.
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CFS Vs CFS Mk II
CFS
No provision for continuous transactional and system audit.

CFS Mk II
yContinuous transactional and systems audit and findings made public.

Premium rate capped at 30-days KIBOR + 10%

yNo cap on premium rate

Financiers can hold back lending capacity.

Mandatory on Financier to lend committed amount.

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CONTINUOUS FUNDING SYSTEM - CFS Mk II

Benefits of CFS Mk II


Transparent and efficient financing for the market. Level playing field for investors and brokers Risk management concentrated in NCCPL. Institutional bulk pool of funds available for at least 90 days.

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Eligible Participants Financier


I. II.  

Categories of AFs:
Non Broker AFs (NBAF) Broker AFs (BAF) All eligible financiers to acquire AF status from NCCPL. AF premises fitted with NCCPLs automated terminal, enabling real time financing.

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Eligible Financiers to CFS Market

All Scheduled Banks Mutual Funds Special purpose CFS financing Mutual Funds; NBFCs Insurance companies DFIs Brokers, both corporate and individual Any other Corporate Entity as may be approved by the NCCPL Board of Directors.
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Eligible Participants Finance

Brokers are the only takers of finance from CFS market on behalf of their clients and for their own account.

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Modus Operandi for CFS- MK II CFS     

Specified shares plus desired rate of return required by Financier input into system. All offers and bids transparently displayed on system. Finance able to place own bid for acquiring financing. Trading done on undisclosed basis. CFS contract will be for 22 working days. On expiry of 22 working days, CFS contract automatically be liquidated and finance forced released. No IDS facility shall be allowed to FIs in the stock market where they fund the CFS market through brokers. NCCPL to conduct pre-CFS trade verification. All acceptances of finance by inserting unique client codes registered on UIN system. Continuous transactional and systems audit and findings made public. 81

  

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Certainty of Funding

  

Mandatory on Financier to lend committed amount Financier locked in on each contract for 22 working days. AF may provide additional funds over and above committed amount. Advance notice of 22 working days for withdrawal of additional funds. Amounts invested in any eligible share at the financiers discretion.

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Important Statistics to be made available to the general public on periodic basis, such as:
   Utilized committed lines Total funds due to be released in next 3 days on maturity of CFS contracts Number of financiers and finances in the market

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Cost of Finance

Market forces of demand and supply to determine cost of finance. AFs can lend below the commitment rate. Commitment Rate is 30-days KIBOR plus 4% Offered interest rate determined by each individual Financier based on his own risk assessment of each scrip

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Risk Management and Capital Adequacy Regime

 Current Risk Management and Capital Adequacy Regime applicable to CFS Mk II.  Mark-to-market losses to be collected in the form of cash.

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Acceptable collateral

Shares of listed companies Undertaking by FIs rated AA and better Treasury Bills and PIBs (at later stage) Bank Guarantee Cash

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Eligibility Criteria for scripts in CFS Mk II

Eligibility Criteria to be developed by NCCPL based on parameters such as: 1. 2. 3. Average daily impact cost; No. of days traded in last 3 months; Free float etc.

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Position Limits

 Scrip-wise position limit imposed is as follows:

   

Market wide position limit: 40% of free-float for each scrip. Member wide position limit: 10% of free-float of the scrip. Client wide position limit: 5% of free-float of the scrip. (Client position will be universal and determined on UIN basis) Member Capital Adequacy: 15 times the NCB of member

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Default Management in CFS MK-II MK1.

Where Authorized Financier (AF) or Financee fails to settle its money obligation on a settlement day by 12 noon, the NCCPL shall issue a 30minutes notice to such AF or Financee as the case may be. Where such AF or Financee fails to settle its money obligation within 30minutes, the NCCPL shall suspend them and this information shall be disseminated to all the Stock Exchanges. The respective Stock Exchange(s) shall also suspend such AF (in case of BAF) or Financee in all markets namely Ready and Futures markets. The NCCPL shall take following steps to complete the settlement:

2.

3. 4. 

The securities held in the CDC Blocked Account of suspended AF shall with immediate effect stand transferred in the name of NCCPL; cont.

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Default Management in CFS MK-II MK-

    

Collateral held against exposure margins and MTM losses of such suspended AF or Financee will be utilized; The NCCPL shall arrange financing against the retrieved securities and securities deposited as collateral; Utilization of CFS Protection Fund. The NCCPL shall ask the relevant Stock Exchange (s) to provide the shortfall amount as per their regulations; and If the cumulative amount mentioned above is not sufficient, the NCCPL shall hold the proportionate amounts according to the receivables due to all Clearing Members on that settlement day; and cont.

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Default Management in CFS MK-II MK5. In order to proceed further the NCCPL shall refer the case to the Default Management Committee which comprises of the MD and Chairman of the relevant Exchange and NCCPL and nominee from Banking Association and MUFAP In consultation with the aforementioned Committee, the NCCPL shall netoff all unsettled positions of all the market in each security and determine the security-wise net positions for squaring-up/closed-out. However, in case of default by AF, all his first ticket purchase contracts will be funded by NCCPL and would be closed out when released by the Financee(s) The NCCPL shall square-up the securities in the ready market of the relevant exchange.

6.

7.

cont.

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Default Management in CFS MK-II MK8. Where, the NCCPL is unable to square-up such securities in the regular market of the relevant exchange, the NCCPL shall square-up such securities through a system whereby all Clearing Members (including Non-Brokers) can make a bid for such securities directly. Where the shortfall still remains after the completion of squaring-up procedure the NCCPL shall after determining the final loss serve a Final Loss Notice to such suspended AF or Financee. Where the suspended AF or Financee fails to comply with the said notice, the NCCPL shall declare it to be a Defaulting AF or Financee. Consequently, the relevant exchange(s), shall also declare such AF (in case of a BAF) or Financee to be a defaulter in all markets namely Ready and Futures markets

9.

10. 11.

cont.
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Default Management in CFS MK-II MK-

12.

After the declaration of default, the assets of such defaulting AF (in case of a BAF) or Financee under the control of relevant stock exchange such as Membership Card and Room etc shall be liquidated and the proceeds shall be proportionately allocated to all the markets. In the event there are still unmet losses, the NCCPL shall determine the balance amount exchange-wise, market-wise and security-wise. After determination of the final loss it will be allocated on a pro rata basis to all AFs who hold open positions in that particular security of CFS Mark II.

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Roadmap for CFS Mk II Implementation

Legal And Regulatory Framework

Milestone
Finalizing of the Concept Paper of CFS MK-II yCirculation of the final Concept Paper of the Market elements yFinalization of CFS MK-II Regulations, Master Agreement with AFs, Bank Guarantee and irrevocable Undertaking Distribution of CFS MK-II Regulations, Master Agreement with AFs, Bank Guarantee and irrevocable Undertaking Finalization of CFS MK-II Regulations by the Committee Alignment of the Stock Exchanges Regulations with NCCPL Regulations Obtain NCCPL Board and SECP Approval for NCCPL CFS MK-II Regulations

Target / Completion date

June 04, 2007 Done yJuly 20, 2007 yJuly 25, 2007 yJuly 30, 2007 yIn progress yAugust 10, 2007
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Roadmap for CFS Mk II Implementation Cont.

System Design, Development, Testing & Implementation
Connectivity
Infrastructure Development

Target / Completion date

Done

CFS MK-II System Development

Development and Testing of Trading Infrastructure Application Development of RMS Module and Integration Testing with Trading Infrastructure Application Market Participants Training Application Live Run
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yJuly 28, 2007 yAugust 15, 2007 yAug 15,2007 yTo y Aug 24, 2007 ySeptember 1, 2007
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Thank you !
NATIONAL CLEARING COMPANY OF PAKISTAN LIMITED
8th Floor, Karachi Stock Exchange Building, Stock Exchange Road, Karachi 74000 Pakistan
TEL : (92-21) 246 0820-23 FAX: (92-21) 246 0827 (920820(92E-Mail : lukman@nccpl.pk Website : http://www.nccpl.com.pk

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